Euro woes force Asia hardware makers to rethink biz

Gloomy Eurozone outlook reduces demand from European firms and households for Asia's IT products, forcing manufacturers to diversify to other markets and growth segments.
Written by Ryan Huang, Contributor

The deepening Eurozone crisis has left tech companies, particularly Asia's hardware vendors, vulnerable to market fluctuations and lower consumer demand, forcing them to relook their business strategies and diversifying to growth sectors such as energy and mobile devices.

Worries over the eurozone have seen its currency weaken over the past year. The euro, against the US dollar, is currently trading at around $1.20, down from $1.45 last July. The worst is not over in Europe either, according to Leong Wai Ho, senior economist at Barclays Capital, who expects the euro to drop further to $1.15 in 12 months' time.

"Our [most-likely scenario prognosis] is no crisis, but an extended period of muddling as European leaders grope their way toward some semblance of fiscal unity [would likely lead to lingering uncertainty]," Leong said.

This means overseas earnings in Europe are eroded when translated back to a stronger Asian currency. It is for this reason South Korean electronics giant Samsung reportedly entered "crisis management" in early July to mitigate the threat of the falling euro.

"The euro is rapidly losing its currency value. Samsung Electronics is currently being run by scenario-based management as the eurozone is one of its biggest markets,’’ said Rhee In-yong, a communications officer at Samsung, in the report.

Hardware makers most vulnerable
Samsung will not be the only Asian hardware maker to suffer from the current economic climate. Leong pointed out Europe is a significant market for the region's hardware products, and he expects demand for PCs and ultrabooks, as well as networking gear, to slow as IT departments and household budgets in Europe are cut further.

The senior economist noted this has led Asian IT firms to trim back their forecasts and concentrate on Northern Europe and U.K. markets, where consumer demand seems to be less badly affected. 

He said manufacturers are also holding less inventory than usual, in case a systemic shock materializes. Sellers of leading edge or new concept consumer products will be less impacted though, and this group includes the likes of Apple and Samsung as well as makers of Windows 8-equipped PCs, he added.

Agreeing, Andrew Milroy, vice president of ICT practice for Asia-Pacific at Frost & Sullivan, said all Asian tech firms with a strong presence in Europe, including HTC, Asus, Lenovo, and LG Electronics, would be vulnerable. The hardest hit will be Japanese firms as the yen has been appreciating, he added.

One Japanese firm, Panasonic, has noted its clients have also been suffering from rising costs in trade finance due to the European debt contagion. The European banks have cut and contracted their balance sheets and withdrawn their funds in Asia, said Yorihisa Shiokawa, managing director at Panasonic Asia-Pacific.

"This is increasing the cost of financing for a number of small banks and also causes lack of credit for the private companies, which is subsequently hitting at economic growth in the Southeast Asian region," Shiokawa noted.

He added other factors have also compounded the situation for Japanese firms, such as concern over electric supply shortages caused by the earthquake in Japan and the disruption of IT supply chain due to the floods in Thailand last year.

Rethinking business plans
Asked if it would make sense for Asian companies to move their base from China to Europe to alleviate currency costs, Milroy said since Europe is more expensive than most Asian locations for manufacturing, this is not a viable option.

"Companies need to focus on markets where there is growth in a downturn such as tablets, smartphones, and cloud computing," the Frost & Sullivan analyst suggested.

Panasonic said it implemented various measures to cope with the declining business conditions such as diversification. In particular, it has been looking for new business segments to develop such as energy, it revealed. Similarly, embattled Japanese firm Sony has started to look at non-core segments more closely such as in medical devices. 

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